Debate on Hong Kong listing reform gets more time

The controversy about plans to change listing rules for Hong Kong’s stock exchange has given executives, accountants, lawyers and other interested parties two more months to discuss the proposals.  The Securities and Futures Commission (SFC) and the Stock Exchange of Hong Kong extended, until November 18, the deadline for a consultation, launched in June, on proposed enhancements to the decision making and governance structure for listing regulation.

A series of concerns about the quality of listed companies have prompted the reform, including accounting problems, high concentration of holdings, price fluctuations and back-door listings through purchase of shell companies. Hong Kong’s stock exchange has even been named “a factory for shell companies”. The aims of the SFC are to have more coordination with the exchange and to have more direct input. It wants to be involved earlier in the listing process and have a direct say in deciding on listing applications rather than just getting a veto power. With a more streamlined process, the SFC hopes to be in a better position to address regulatory needs.

The 28-member Listing Committee, consisting of company executives, accountants and lawyers, is responsible for listing policies and application approvals. Listing powers and functions are delegated to the Listing Department and the chief executive of the Exchange but the Listing Committee has an oversight role. The SFC is responsible for supervising the Exchange’s listing functions, including investigation and enforcement. However, the power to approve listings and set listing policies lies with the Hong Kong Exchanges and Clearing Limited (HKEX) and the Listing Committee.

New structures

The reform proposes to set up two new Exchange committees: the Listing Policy Committee and the Listing Regulatory Committee, with equal representation from the SFC and the Hong Kong Exchanges and Clearing Limited (HKEX). The aim of the Listing Policy Committee, which will comprise representatives from the SFC and the Listing Committee, the chief executive of the HKEX and the chairperson of the Takeovers and Mergers Panel, will be to develop policy responses to regulatory needs. The Listing Regulatory Committee will comprise representatives from the SFC and the Listing Committee and will decide on cases that have suitability issues or have broader policy implications. The Listing Committee and the Listing Department will continue deciding on matters that do not have any suitability concerns. The Listing Committee will still maintain representation from investors, listed issuers and market practitioners but the chief executive of the HKEX will cease to be a member. Ninety percent of listing applications go to the Listing Committee at the moment, while the rest go through multiple committees.

More scrutiny

Some observers are worried the proposed reform will mean companies will look to list elsewhere, such as in Mainland China. They are also concerned about increased scrutiny by the SFC. “The SFC is not market oriented,” says Raymond Cheung, a partner in the corporate and commercial practice of ONC Lawyers. “The SFC should set out the requirement, but there is no need for it to have power to approve listings.”

“Instead of a major change, the listing requirements need to be enforced,” says Cheung. “Malpractice also might not be related to the listing application. There are already existing tools in the Securities and Futures Ordinance (SFO) to target problems like false information, but they need to be used. High concentrations of shareholding is also another issue especially for companies listed on the Growth Enterprise Market (GEM) board. The control in ownership needs to be broadened so that the chances of manipulation are lower.”

Raymond Cheung

“Businesses looking to come to Hong Kong to do a listing should do it as soon as possible,” says Cheung. “But they should be careful in selecting sponsors and also not appoint a sole underwriter. Problems often come up when businesses do not go through detailed pre-listing suitability requirements and issues are discovered afterwards.”

With the upcoming deadline for submitting views and recommendations, there is room for slight tweaks to the proposed ideas, but it looks like the reform will get the green light. The SFC and the HKEX will need to tread a fine line between maintaining Hong Kong as the hub for listings while ensuring the quality of companies that are allowed to be listed.